What Is The Difference Between a Pension and 401(k) Plan?

401(k) vs Pension Plan: Differences and Which is Better For You

A 401(k) plan is a retirement savings plan in which employees contribute to a tax-deferred account via paycheck deductions (and often with an employer match). A pension plan is a different kind of retirement savings plan in which a company sets money aside to give to future retirees.

Over the past few decades, defined-contribution plans like the 401(k) have steadily replaced pension plans as the private-sector, employer-sponsored retirement plan of choice. While both a 401(k) plan and a pension plan are employer-sponsored retirement plans, there are some significant differences between the two.

Here’s what you need to know about a 401(k) vs. pension.

Key Points

•   A 401(k) is primarily funded by employee contributions, often matched by employers, whereas pensions are predominantly employer-funded.

•   Pensions guarantee a fixed income for life, unlike 401(k)s where the value depends on contributions and investment performance.

•   Employees can choose their 401(k) investments, but employers control pension fund investments.

•   Annual contribution limits for 401(k)s in 2025 are $23,500, or $31,000 for those 50 and older (including the $7,500 catch-up amount). Thanks to SECURE 2.0, those ages 60 to 63 can make a “super catch-up” contribution, up to $11,250 instead of $7,500.

•   Pensions offer a stable retirement income, but 401(k)s provide more control over investment choices and potential growth.

What Is the Difference Between a Pension and a 401(k)?

The main distinction between a 401(k) vs. a pension plan is that pension plans are largely employer driven, while 401(k)s are employee driven.

These are some of the key differences between the two plans.

Pension

401(k)

Funding Typically funded by employers Funded mainly by the employee; employer may offer a partial matching contribution
Annual Contribution Limits No more than $275,000 in 2024 or 100% of employee’s average compensation for the highest 3 consecutive years $23,000 in 2024 and $23,500 in 2025; for those 50 and up it’s $30,500 and $31,000. And in 2025, those aged 60 to 63 may contribute an additional $11,250 instead of $7,500, thanks to SECURE 2.0.
Investments Employers choose the investments for the plan Employees choose the investments from a list of options
Value of the Plan Set amount designed to be guaranteed for life Determined by how much the employee contributes, the investments they make, and the performance of the investments

Funding

Employees typically fund 401(k) plans through regular contributions from their paychecks to help save for retirement, while employers typically fund pension plans.

Investments

Employees can choose investments (from several options) in their 401(k). Employers choose the investments that fund a pension plan.

Value

The value of a 401(k) plan at retirement depends on how much the employee has saved, in addition to the performance of the investments over time. Pensions, on the other hand, are designed to guarantee an employee a set amount of income for life.


💡 Quick Tip: The advantage of opening an IRA and a tax-deferred account like a 401(k) or traditional IRA is that by the time you retire, you’ll have tax-free income from your Roth, and taxable income from the tax-deferred account. This can help with tax planning.

Pension Plan Overview

A pension plan is a type of retirement savings plan where an employer contributes funds to an investment account on behalf of their employees. The earnings are paid out to the employees once they retire.

Types of Pension Plans

There are two common types of pension plans:

•   Defined-benefit pension plans, also known as traditional pension plans, are the most common type of pension plans. These employer-sponsored retirement investment plans are designed to guarantee the employee will receive a set benefit amount upon retirement (usually calculated with set parameters, i.e. employee earnings and years of service). Regardless of how the investment pool performs, the employer guarantees pension payments to the retired employee. If the plan assets aren’t enough to pay out to the employee, the employer is typically on the hook for the rest of the money.

According to the IRS, annual contributions to a defined-benefit pension plan cannot exceed 100% of the employee’s average compensation for the highest three consecutive calendar years of their employment or $275,000 for 2024, $280,000 for 2025.

•   Defined-contribution pension plans are employer-sponsored retirement plans to which employers make plan contributions on their employee’s behalf and the benefit the employee receives is based solely on the performance of the investment pool. Meaning: There is no guarantee of a set monthly payout.

Like 401(k) plans, employees can contribute to these plans, and in some cases, employers match the contribution made by the employee. Unlike defined-benefit pension plans, however, the employee is not guaranteed a certain amount of money upon retirement. Instead, the employee receives a payout based on the performance of the investments in the fund.

Recommended: What Is a Money Purchase Pension Plan (MPPP)?

When it comes to pension plan withdrawals, employees who take out funds before the age of 59 ½ must pay a 10% early withdrawal penalty as well as standard income taxes. This is similar to the penalties and taxes associated with early withdrawal from a traditional 401(k) plan.

Pros and Cons

There are benefits to and drawbacks of pension plans. It’s important to understand both in order to maximize your participation in the plan.

Advantages of a pension plan include:

Funded by employers

For employees, a pension plan is retirement income from your employer. In most cases, an employee does not need to contribute to a defined-benefit pension plan in order to get consistent payouts upon retirement.

Higher contribution limits

When compared to 401(k)s, defined-contribution pension plans have significantly higher contribution limits and, as such, present an opportunity to set aside more money for retirement.

A set amount in retirement

A pension plan typically provides employees with regular fixed payments in retirement,usually for life.

Disadvantages of a pension plan include:

Lack of control

Employees can’t choose how the money in a pension plan is invested. If the investments don’t pan out, the plan could struggle to pay out the funds.

Vesting

Employees may need to work for the employer for a set number of years to become fully vested in the plan. If you leave the company before then, you might end up forfeiting the pension funds. Find out what the vesting schedule is for your pension plan.

Earnings and years employed

How much an employee gets in retirement with a pension plan generally depends on their salary and how long they work for the employer.

401(k) Overview

A traditional 401(k) plan is a tax-advantaged defined-contribution plan where workers contribute pre-tax dollars to the investment account via automatic payroll deductions. These contributions are sometimes fully or partially matched by their employers, and withdrawals are taxed at the participant’s marginal tax rate.

With a 401(k), employees and employers may both make contributions to the account (up to a certain IRS-established limit), but employees are responsible for selecting the specific investments. They can typically choose from offerings from the employer, which may include a mixture of stocks and bonds that vary in levels of risk depending on when they plan to retire.

Recommended: 401(a) vs 401(k): What’s the Difference?

Contribution Limits and Withdrawals

To account for inflation, the IRS periodically adjusts the maximum amount an employer or employee can contribute to a 401(k) plan.

•  For 2024, annual employee contributions can’t exceed $23,000 for workers under 50, and $30,500 for workers 50 and older (this includes a $7,500 catch-up contribution). The total annual contribution by employer and employee in 2024 is capped at $69,000 for workers under 50, and $76,500 for workers 50 and over.

•   For 2025 the total employer + employee limit is $70,000, $77,500 with standard catch-up, or $81,250 with the SECURE 2.0 catch-up for those ages 60 to 63 only.

Some plans allow employees to make additional after-tax contributions to their 401(k) plan, within the contribution limits outlined above.

•   Money can be withdrawn from a 401(k) in retirement without penalties. But taxes will be owed on the funds withdrawn. The IRS considers the removal of 401(k) funds before the age of 59 ½ an “early withdrawal.” The penalty for removing funds before that time is an additional tax of 10% of the withdrawal amount (there are exceptions, notably a hardship distribution, where plan participants can withdraw funds early to cover “immediate and heavy financial need”).

Pros and Cons

While a 401(k) plan might not offer as clearly-defined a retirement savings picture as a pension plan, it still comes with a number of upsides for participants who want a more active role in their retirement investments.

Advantages of a 401(k) include:

Self-directed investment opportunities

Unlike employer-directed pension plans, in which the employee has no say in the investment strategy, 401(k) plans offer participants more control over how much they invest and where the money goes (within parameters set by their employer). Plans typically offer a selection of investment options, including mutual funds, individual stocks and bonds, exchange traded funds (ETFs).

Tax advantages

Contributions to a 401(k) come from pre-tax dollars through payroll deductions, reducing the gross income of the participant, which may allow them to pay less in income taxes. Also, 401(k) contributions and earnings in the plan may grow tax-deferred.

Employer matching

Many 401(k) plan participants are eligible for an employer match up to a certain amount, which essentially means free money.

Disadvantages of a 401(k) include:

No guaranteed amount in retirement

How much you have in your 401(k) by retirement depends on how much you contributed to the plan, whether your employer offered matching funds, and how the investments you chose fared.

Contributions are capped

The amount you can contribute to a 401(k) annually is capped by the IRS, as described above.

Less stability

How the market performs generally affects the performance of 401(k) investments. That could make it difficult to know how much money you’ll have for retirement, which could complicate retirement planning.


💡 Quick Tip: Before opening an investment account, know your investment objectives, time horizon, and risk tolerance. These fundamentals will help keep your strategy on track and with the aim of meeting your goals.

Which Is Better, a 401(k) or a Pension Plan?

When considering a 401(k) vs. pension, most people prefer the certainty that comes with a pension plan.

But for those who seek more control over their retirement savings and more investment vehicles to choose from, a 401(k) plan could be the more advantageous option.

In the case of the 401(k), it really depends on how well the investments perform over time. Without the safety net of guaranteed income that comes with a pension plan, a poorly performing 401(k) plan has a direct effect on a retiree’s nest egg.

Did 401(k)s Replace Pension Plans?

The percentage of private sector employees whose only retirement account is a defined benefit pension plan is just 4% today, versus 60% in the early 1980s. The majority of private sector companies stopped funding traditional pension plans in the last few decades, freezing the plans and shifting to defined-contribution plans like 401(k)s.

When a pension fund isn’t full enough to distribute promised payouts, the company still needs to distribute that money to plan participants. In several instances in recent decades, pension fund deficits for large enterprises like airlines and steel makers were so enormous they required government bailouts.

To avoid situations like this, many of today’s employers have shifted the burden of retirement funding to their workers.

What Happens to a 401(k) or Pension Plan If You Leave Your Job?

With a 401(k), if you leave your job, you can take your 401(k) with you by rolling it over to your new employer’s 401(k) plan or into an IRA. The process is fairly easy to do.

If you leave your job and you have a pension plan, however, the plan generally stays with your employer. You’ll need to keep track of it through the years and then apply in retirement to begin receiving your money.

The Takeaway

Pension plans are employer-sponsored, employer-funded retirement plans that are designed to guarantee a set income to participants for life. On the other hand, 401(k) accounts are employer-sponsored retirement plans through which employees make their own investment decisions and, in some cases, receive an employer match in funds. The post-retirement payout varies depending on market fluctuations.

While pension plans are far more rare today than they were in the past, if you have worked at a company that offers one, that money will still come to you after retirement even if you change jobs, as long as you stayed with the company long enough for your benefits to vest.

Some people have both pensions and 401(k) plans, but there are also other ways to take an active role in saving for retirement. An IRA is an alternative to 401(k) and pension plans that allows anyone to open a retirement savings account. IRAs have lower contribution limits but a larger selection of investments to choose from. And it’s possible to have an IRA in addition to a 401(k) or pension plan.

Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

Easily manage your retirement savings with a SoFi IRA.

FAQ

Can you have both a 401(k) and a pension plan?

Yes. An individual can have both a pension plan and a 401(k) plan, though the two plans may not be from the same employer. If an employee leaves a company after becoming eligible for a pension and opens a 401(k) with a new employer, their previous employer will still typically maintain their pension. An employee can access the pension funds by applying for them in retirement.

How much should I put in my 401k if I have a pension?

If you have both a pension and a 401(k), it’s wise to contribute as much as you can to your 401(k) up to the annual contribution limit. While a pension can help supplement your retirement income, it may not be enough to cover all your retirement expenses, so contributing to your 401(k) can help fill the gap. One rule of thumb says to contribute at least 10% of your salary to a 401(k) if possible to help ensure that you’ll have enough savings for retirement.


Photo credit: iStock/Sam Edwards

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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Shares of ETFs must be bought and sold at market price, which can vary significantly from the Fund’s net asset value (NAV). Investment returns are subject to market volatility and shares may be worth more or less their original value when redeemed. The diversification of an ETF will not protect against loss. An ETF may not achieve its stated investment objective. Rebalancing and other activities within the fund may be subject to tax consequences.

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Does Your Cable Bill Affect Your Credit Score?

Does Your Cable Bill Affect Your Credit Score?

If you’re responsible about paying your cable bill on time, your cable bill likely won’t impact your credit score at all. Payments on your cable bill generally are not reported to the credit bureaus — unless they’re seriously late. In that case, if your payments are late enough to be sent to collections, you could see your score drop.

Also, if you use a credit card to pay your cable bill, it could impact your score, depending on how you manage those payments. Learn more here.

Key Points

•   Cable bills typically do not affect credit scores unless unpaid and sent to collections.

•   Using a credit card to pay cable bills can impact credit through payment history and utilization ratio.

•   Managing a credit card responsibly to pay cable bills can help positively impact a credit score.

•   Secured credit cards and authorized user status on a credit card can build credit history.

•   Paying bills on time and keeping low credit card balances builds credit.

What’s a Cable Bill?

A cable bill is a statement for an unpaid entertainment service or subscription, like a cable television subscription or package plan. It might include costs like the base price of the plan or service, along with other fees.

Cable bills fall under the “utility bills” category, which includes other household expenses, like electricity, water, and gas. However, unlike those essential utilities, cable service might be one of the first expenses to cut if you’re living on a budget.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

How Not Paying Your Cable Bill Affects Your Credit

Your cable bill generally doesn’t affect your credit score — that is, unless you fail to pay it.

On-time cable bill payments won’t help you build credit, nor will they strengthen it. That’s due to the fact that cable servicers don’t traditionally report timely payments to the major credit bureaus (Experian®, Equifax®, and TransUnion®).

If you’ve missed multiple payments, servicers can do one of two things: charge off the unpaid balance or send it to collections. In both situations, your credit score will take a hit.

Recommended: What is a Charge Card?

How Do Late Cable Bill Payments Affect Credit Score?

Whether paying a cable bill late affects your credit depends on how late you are with payment. Typically, late payments are reported to credit bureaus when they’re at least 30 days overdue and are marked delinquent.

If you provide a late payment after your due date, but before it’s sent to the bureaus, the consequences are at your service provider’s discretion. However, if the payment was made after the late payment was reported, or you missed a payment entirely, your credit score will usually drop.

Recommended: When Are Credit Card Payments Due?

How Long Does Late Cable Bill Payment Negatively Impact Your Credit?

Late payments that are reported to the credit bureaus have a lasting effect, whether it was one indiscretion or a chronic occurrence. Late cable bill payments can stay on your credit report for up to seven years.

As such, if you’re finding yourself routinely struggling to put aside enough for your cable bill, you might look into methods for saving on streaming services.

How to Use Your Cable Bill to Build Credit

Paying bills with a credit card is a straightforward way to establish credit when you’re new to it. If you’ve been approved for your first credit card, you might consider using it to pay for your cable bill.

Then, when your credit card bill is due, you can make a manual payment. Even better, set up automated bill payments ahead of time so you never miss a bill.

As you make on-time payments on your credit card, your card issuer will routinely report your positive payment data to the credit bureaus. Over time, with responsible credit card repayment and keeping your revolving debt manageable, you can build your credit.

Recommended: Tips for Using a Credit Card Responsibly

Alternative Ways to Build Credit

If you’ve never had credit or you want to take steps to positively impact your credit profile, here are a few other strategies to build credit.

•   Get a secured credit card. A secured card can offer a small credit line to new credit users. It requires a deposit, which the card issuer typically sets as your credit limit. As you use your card up to this limit and repay it, the issuer reports your payment activity to the bureaus.

•   Get a retail card. Store-branded credit cards, such those from department stores, gas stations, or retail brands, can be easier to get than traditional credit cards. However, they usually have lower credit lines.

•   Make payments on time. When you do open a new credit card or installment loan, stay on top of monthly payments as they account for 35% of your credit score. Organize bills to identify when your due dates are, and consider enrolling in auto-pay to conveniently pay your bills on time.

•   Apply for an installment loan. This might include consumer loans, like a secured personal loan or an auto loan, to help you build your credit file. If you’re a college student and need additional financial aid beyond scholarships, grants, or work-study, a student loan can help pay for your education and establish your credit profile. Always seek out federal student loans first, before a private student loan. Federal loans offer greater borrower protections and benefits.

•   Ask your landlord to report rent payments. Most landlords don’t report your on-time rental payment data to the credit bureaus. However, more third-party services, including Experian’s own Experian RentBureau, are making this possible. Ask your landlord if they are willing to share your good rent payment activity with credit bureaus for your credit file.

•   Become an authorized user. Ask someone with whom you have a close relationship, like a parent, grandparent, spouse, or sibling, if they will add you to their credit card account as an authorized user. Some lenders report good payment habits to the credit bureaus for all users on the account. Even if you’re not liable for making payments on the credit card, the reported data can establish your credit and build your score.

Recommended: Understanding Purchase Interest Charges on Credit Cards

The Takeaway

Although your cable bill typically doesn’t impact your credit score, staying in good standing on the account can help keep your credit out of trouble. That’s because seriously overdue payments can show up on your credit report, where they’ll remain for up to seven years. On the other hand, one way that you can get your cable bill payments to have a positive effect on your credit is by using your credit card to pay it and always paying your bill on time.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Does paying cable bills on time build your credit score?

Cable providers typically don’t report on-time payments to the credit bureaus. Since this data isn’t shared with the bureaus, timely payments don’t directly affect your credit score. However, if you pay on time with a credit card, that could positively affect your score.

Do late cable bill payments hurt your credit score?

Late cable bills affect credit scores if they’re marked as a charge-off by your provider or are sent to a debt collector. Accounts with these statuses are reported to credit bureaus and harm your score.

Are cable bill payments reported to a credit bureau?

Cable bill payments typically aren’t reported to credit bureaus, unless you’ve missed multiple payments that have been charged-off or are in collections.


Photo credit: iStock/damircudic

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Does Investing in Stocks Affect Your Credit Score?

Does Investing in Stocks Affect Your Credit Score?

While there are many things that determine your credit score — including your payment history, credit utilization, and the average age of your credit accounts — investing in stocks is not one of them.

That being said, while investing or opening an investment account does not directly affect your credit score, it’s possible for it to have an indirect effect. For instance, if you open a margin investment account that comes with a loan or line of credit, that debt may show up on your credit score. Additionally, your investment performance may have an impact on your overall financial picture, which can affect your ability to pay off your debts.

Key Points

•   Investing in stocks does not directly impact your credit score.

•   Opening a margin account may require a credit check as it can be viewed as a loan.

•   A credit check for a margin account can temporarily lower your credit score.

•   Poor investment performance can indirectly affect your credit score through financial strain.

•   If investment performance is poor, a person might pay bills late or rely too heavily on high-interest credit cards.

How Does Trading Stocks Affect Your Credit Score?

There are many factors to consider before investing in stocks, like how to choose good investments or making sure that your overall finances are sound. The good news is that in most cases, you won’t need to worry about how trading stocks affects your credit score.

That’s because the amount of money you have in investment accounts (and how well you do at investing in stocks) does not usually show up on your credit report or impact your credit score. As such, investing isn’t a path toward establishing credit.

Recommended: Tips for Using a Credit Card Responsibly

What Happens to Your Credit Score if You Open a Brokerage Account?

If you’re looking to get started with investing in stocks by working with a broker, know that brokerage accounts are not typically reported to the major credit bureaus. This means that opening a brokerage account generally should not have any overall impact on your credit score.

One possible exception is if you open a margin account. Margin accounts allow you to borrow money and buy stocks for more than the actual cash you have in your account. Because some brokerages consider margin accounts as loans, there may be a credit check involved. This could have a small impact on your credit score (typically, it will lower your score by several points), but it usually goes away after a few months.

How Does Opening an Investment Account Affect Your Credit Score?

Most investment accounts do not show up on your credit report. So, opening an investment account will generally not affect your credit score. Whether you are buying stocks with a credit card or investing by depositing cash into your account, your balance and investment performance will not impact your credit score.

That being said, opening an investment account and actively investing in stocks or other investments can indirectly affect your credit score. If you end up losing money in the stock market, it might negatively impact your ability to meet your other debt obligations. Should you have money tied up in your investment account and end up leaning more on your credit cards to cover costs or missing payments, that can have a negative impact on your credit score (say, by raising your credit utilization ratio or leading to late payment) and hamper your efforts at building credit.

Recommended: When Are Credit Card Payments Due?

How Making Investments May Affect Your Credit Score

There are many different ways to invest your money, and many different types of investments. But nearly all investment accounts do not show up in your credit score. So regardless of what type of investing you prefer — whether stocks, bonds, mutual funds, precious metals, or something else — your investing activity should not impact your credit score.

Recommended: Breaking Down the Different Types of Credit Cards

The Takeaway

Investing in stocks is one popular way that some people build wealth. While there are pros and cons to investing in stocks, it’s important to realize that investing in stocks — or most types of investments, for that matter — does not show up on your credit report and does not affect your score.
That said, there are other ways to positively impact your credit score, including using a credit card wisely.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Can I open a brokerage account with a bad credit score?

Yes, you can open a brokerage account with a bad credit score. Generally speaking, your broker will not issue a credit check to open a brokerage account. Additionally, in most cases, your brokerage account will not show up on your credit report. One exception may be if you apply for a margin account. Margin accounts can be considered loans, so your broker may not approve you for one if you have bad credit.

Can I open an investment account with a bad credit score?

There generally is not a credit check to open an investment account, so it is usually possible to open an investment account even if you have a bad credit score. Further, most investment accounts will not show up on your credit report, help you build credit, or impact your credit score.

Do stocks show up on your credit report?

In most cases, stocks (as well as bonds, mutual funds, and other investments) do not show up on your credit report. Your account information, balance, and investment performance do not usually impact your credit score.


Photo credit: iStock/tdub303

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third Party Trademarks: Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER®, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board's initial and ongoing certification requirements.

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Do Credit Unions Help You Build Your Credit?

Do Credit Unions Help You Build Your Credit Score?

While joining a credit union likely won’t affect your credit score in and of itself, some of the financial products offered by credit unions can have an impact on your score. For example, a credit union may offer lower interest rates on loans, which can help you keep an affordable monthly payment that’s easier to make on time. You also may be more likely to get approved for a credit union credit card than one from a bank, and responsibly using that card could help you build your credit score.

Key Points

•   Credit unions, which are nonprofit financial institutions, do not help build your credit in and of themselves.

•   Credit unions may offer easier credit card approval, especially for beginners, which can help build credit.

•   Lower interest rates and fewer fees help manage and pay off debt more effectively.

•   Automatic payments from checking to credit card accounts prevent missed payments.

•   Funds in credit unions are insured by the NCUA, ensuring account safety.

What Is a Credit Union?

A credit union is a nonprofit financial organization that exists to serve its members, who are also its owners. This can mean that credit unions may be able to offer higher interest rates on savings and lower interest rates on loans and credit cards, as well as charge fewer fees.

Credit unions can offer many of the same financial services and products as banks and online lenders, though their lineup and number of locations can be a bit more limited. To gain access to a credit union’s products, you’ll need to become a member, which entails meeting certain requirements. Credit unions often target certain communities or regions.

Recommended: What Is a Charge Card?

Credit Unions vs Banks vs Online Lenders

Here’s a brief look at how credit unions compare with both banks and online lenders:

Credit Unions

Banks

Online Lenders

Not-for-profit Usually for-profit Usually for-profit
Typically offer lower interest rates on loans than banks or online lenders Typically charge higher interest rates on loans than credit unions Typically charge higher interest rates on loans than credit unions
May offer an array of basic financial products Often offer a full spectrum of financial products and services May offer an array of basic financial products

What Is a Credit Union Credit Card?

Many credit unions partner with credit card issuers to issue a cobranded credit card. The types of credit cards that are offered by credit unions vary widely depending on the particular credit union. They can include rewards credit cards that offer points or cash back or secured cards designed for those looking to build their credit.

Recommended: Does Applying for a Credit Card Hurt Your Credit Score?

What Credit Score Is Typically Needed for a Credit Union Credit Card?

Each credit union is owned by its respective members, so there isn’t a set credit score that’s needed for a credit union credit card. Rather, each credit union sets its own parameters for the credit score and other financial requirements for approval.

That being said, you may have better luck getting approved at a credit union compared to a traditional bank, even if you are still building your credit. Some credit unions may be more flexible than other lenders, but keep an eye on what interest rate you will be charged. Typically, the lower your qualifying score, the higher your interest rate.

How a Credit Union Credit Card Can Help Build Your Credit Score

Here are some of the ways a credit union credit card could help you to build your credit score.

Potentially Easier Approval

Getting approved for and opening a credit card or loan is key to establishing credit. However, it can be challenging to get credit if you’ve never had it before. Because credit unions are owned by their members, you may find it easier to get approved for a new credit card. And if you are denied, it may be easier to talk with a customer service representative and learn what steps you might take to access a card.

Lower Interest Rates

While this isn’t necessarily true across the board, many credit unions offer lower interest rates on debt products like loans and credit cards. Having a lower interest rate can help you build your credit score by making it easier to stay on top of paying down debt.

Fewer Fees

Along with lower interest rates, it‘s common for credit unions to charge fewer fees than traditional banks or other lenders. Since credit unions are not-for-profit, they don’t need to charge some of the fees that banks and other financial institutions do. Paying fewer fees can help you keep more of your money in your pocket to pay down debt and save for the future.

Automatic Payments Option

Many credit unions allow you to set up automatic payments on your credit union credit card account. Additionally, most credit unions offer different checking and savings account options, so you can easily pay your credit card from your checking account. This setup helps avoid missing payments, which can help to build your credit score, given one of the best tips for building credit is to pay your debt obligations in full and on time, each and every month.

Recommended: When Are Credit Card Payments Due?

Are Credit Unions Safe?

Just like money in banks is insured by the Federal Deposit Insurance Corporation (FDIC), the funds you keep in credit union accounts are insured by the National Credit Union Administration (NCUA). NCUA is an organization of the federal government that insures up to $250,000 per individual account that you have at a federally insured credit union.

Still, you’ll also want to take simple steps to keep your account safe online, such as verifying transactions and choosing strong passwords.

Is It Worth It to Join a Credit Union?

Joining a credit union can be a wise financial move, especially if you find one that is a good fit for you and that offers the products and services you need. Many people enjoy being a partial owner of a credit union rather than just being one more customer at a for-profit bank, as credit unions tend to be more community-oriented. And the good news is that switching banks is usually not that difficult.

Alternative Ways to Build Your Credit Score

Joining a credit union won’t help build your credit score on its own, but it can be a good first step toward building your credit. Here are a few other ways that you can build your credit score:

•   Use a credit card cosigner to increase your approval odds.

•   Apply for a secured credit card, which requires making a deposit.

•   Get one of the different types of credit cards from a major issuer.

•   Review your credit report regularly for any inaccurate information.

•   When you buy your next vehicle, use an auto loan and then responsibly make payments.

•   Take out and responsibly use a personal loan.

•   Become an authorized user on the account of someone with strong credit.

Recommended: Tips for Using a Credit Card Responsibly

The Takeaway

Credit unions are nonprofit financial institutions that offer many of the same financial products as banks and other online lenders. But unlike banks, credit unions are owned by their members, which can help keep interest rates high and fees low. Joining a credit union won’t help you build your credit by itself, but taking advantage of credit union perks and financial products may help you build your credit.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Will joining a credit union build my credit score?

Joining a credit union in and of itself will not build your credit score, since the fact that you are a member of a credit union does not usually appear on your credit report. However, credit unions offer many financial products, including loans and credit cards. Making responsible use of some of these credit union offerings can help you build your credit.

What are the disadvantages of joining a credit union?

Because credit unions are owned by their members, you generally can’t simply open up an account. Instead, you may have to belong to a specific group or pay a small membership fee to get an account. Many credit unions are also smaller than most banks, so they may not offer all of the financial products you’d find at a larger bank.

Will credit union credit card payments show up on my credit report?

Most credit card payments — including credit union credit card payments — are reported to the major credit bureaus. Paying your statement balance on time and keeping your balance low can be great ways to help build your credit.


Photo credit: iStock/sshepard

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

This content is provided for informational and educational purposes only and should not be construed as financial advice.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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How Do Low-Income Home Loans Work?

A low-income home loan is designed to make it possible for borrowers with lower income levels to meet their goals of homeownership. Typically, low-income mortgage programs help borrowers overcome a variety of barriers. Alongside those with a low income, these programs can help if someone has a poor credit score, large amount of debt, or a small down payment.

This guide takes a closer look at such details as:

•   How home loans for low-income borrowers work

•   Examples of these programs

•   How to buy a home when someone has a low income.

What Is a Low-Income Home Loan?

When it comes to home loans with low income requirements, these programs tend to have more relaxed income, credit, and down payment requirements than conventional loans. Other advantages of these programs can include lower interest rates, discounted mortgage insurance, and reduced closing costs.

Many low-income loan programs actually have income limits that prohibit those with higher incomes from qualifying. These programs can make it much easier to qualify for a mortgage when someone has a lower income, but they do still need to be able to afford the cost of their monthly payments.

Some of these programs are specifically designed to help first-time homebuyers, and there can be grants, tax credits, and other types of assistance available to new homeowners.

An April 2024 SoFi survey of 500 would-be homeowners suggests that there is significant need for programs for low-income buyers, yet not enough people are aware of them: Respondents named home availability in their price range as their top concern, and one in five people (19%) said they were not at all optimistic that they would find a home in their budget within the next six months. Yet when asked about their awareness of financing options for buyers with lower incomes, there was widespread lack of knowledge, with one in eight buyers not aware of any of the programs.


💡 Quick Tip: SoFi Home Loans are available with flexible term options and down payments as low as 3%.*

Examples of Low-Income Home Loans

There are a few different types of home loans for low-income borrowers. Here are a few popular examples:

•   United States Department of Agriculture (USDA) loans. Even with a low income, it’s possible to qualify for a USDA loan if the borrower plans to buy a home in an eligible rural area. As a bonus, this program doesn’t require a down payment.

•   Federal Housing Administration (FHA) loans. These government-backed loans tend to come with lower credit score requirements than conventional loans and only require a 3.5% down payment, no matter what the buyer’s income level is.

•   Veterans Affairs (VA) loans. Active service members, veterans, and potentially surviving spouses can use a VA loan to buy a home without making a down payment.

First-time homebuyers can
prequalify for a SoFi mortgage loan,
with as little as 3% down.

Questions? Call (888)-541-0398.


How Do Low-Income Home Loans Work?

How low-income home loans work depend entirely on the specific loan program the borrower is applying to. For example, with FHA low-income home loans, borrowers must make a 3.5% down payment, but income levels don’t make borrowers ineligible for a loan.

VA loans on the other hand don’t require a down payment at all. It’s best for mortgage seekers to do careful research on each loan program to confirm if they qualify for a mortgage or not.


💡 Quick Tip: A VA loan can make home buying simple for qualified borrowers. Because the VA guarantees a portion of the loan, you could skip a down payment. Plus, you could qualify for lower interest rates, enjoy lower closing costs, and even bypass mortgage insurance.†

Pros and Cons of Low-Income Home Loans

Home loans for low-income families come with some unique advantages and disadvantages worth keeping in mind.

Pros of Low-Income Home Loans

First, consider the upsides:

•   Low to no down payment requirements

•   Easier to qualify for than conventional loans

•   Less strict credit score requirements

•   May have more favorable interest rates.

Cons of Low-Income Home Loans

Next, review the downsides of these loan programs:

•   May only work for specific applicants (like VA loans)

•   May require ongoing mortgage insurance

•   Can be harder to find low-income loan programs.

Are Low-Income Home Loans Worth It?

Low-income loan programs can be worth it if the math makes sense. It’s generally a good idea to shop around with different lenders to see which mortgage loan will be the most beneficial. It can be a good idea to compare different interest rates, mortgage insurance requirements, and fees to see which loan will cost the least.

Borrowers can research a variety of loan programs to see which may best suit their needs. For example, home loans for low-income single mothers, home loans for low-income seniors, or low-income home improvement loans are designed for different borrowers.

Steps for How to Buy a House With a Low Income

When a borrower has a low income, there are steps they can take to make buying a house easier.

•   Build one’s credit score. The higher someone’s credit score is, the easier it can be to qualify for a home loan. It’s a good idea for borrowers to check their credit score to see where they stand and if there are any mistakes on their credit report that might be harming their credit score. Consumers will want to consistently pay their bills on time if they want to help build their credit score before buying a home.

•   Pay off debt. Another technique that can help build a credit score is to pay off debt. This can be beneficial to one’s score, and the less debt someone has, the easier it can be to qualify for a home loan. Lenders take a borrower’s debt-to-income (DTI) ratio into account when deciding how much money to lend them and the lower this ratio is, the better.

•   Save for a larger down payment. The larger someone’s down payment is, the less money they need to borrow. When someone has a low income, it’s easier to qualify for smaller loans. Conventional wisdom may be that they will put down at least a 20% down payment, even if the low-income mortgage loan program doesn’t require that large of a down payment.

Recommended: What Is a HUD Home?

Low-Income Home Loan Tips

If someone is struggling to qualify for a low-income home loan, these are some steps they can take to make the process easier.

•   Find the right program. To start, finding a niche program designed to meet the applicant’s specific needs can help. For example, a single mother may want to look into low-income home loans for single mothers, as well as more general loan programs.

•   Use a cosigner. If someone’s credit score or income makes it challenging for them to qualify for a mortgage, they can apply with a cosigner who has the qualifications lenders are looking for. The cosigner needs to know they will be responsible for making payments if the main borrower defaults on the loan.

The Takeaway

While income is a major factor that mortgage loan lenders take into consideration, having a low income doesn’t need to disqualify someone from qualifying for a mortgage loan. There are low-income loan programs that can help consumers meet their goals of homeownership.

Looking for an affordable option for a home mortgage loan? SoFi can help: We offer low down payments (as little as 3% - 5%*) with our competitive and flexible home mortgage loans. Plus, applying is extra convenient: It's online, with access to one-on-one help.


SoFi Mortgages: simple, smart, and so affordable.

FAQ

Can I buy a house if I make $25k a year?

Whether or not someone can buy a house with only a $25,000 a year income depends on a few different factors. The overall cost of the house, their down payment amount, and the lender they choose to work with can all impact if their income will make it possible to qualify for a loan.

What’s the lowest score you can have to get a home loan?

Generally borrowers need to have a credit score of at least 620 to buy a home. All lenders and loan programs have different requirements though, so it’s worth researching the loan programs that work for each applicant’s credit score.

Is there an income limit for first-time homebuyers in California?

Some first-time homebuyer programs in California have income limits. These limits exist to stop buyers who have high-income from taking advantage of programs designed to support low-income buyers.


Photo credit: iStock/digitalskillet

*SoFi requires Private Mortgage Insurance (PMI) for conforming home loans with a loan-to-value (LTV) ratio greater than 80%. As little as 3% down payments are for qualifying first-time homebuyers only. 5% minimum applies to other borrowers. Other loan types may require different fees or insurance (e.g., VA funding fee, FHA Mortgage Insurance Premiums, etc.). Loan requirements may vary depending on your down payment amount, and minimum down payment varies by loan type.

SoFi Loan Products
SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.


SoFi Mortgages
Terms, conditions, and state restrictions apply. Not all products are available in all states. See SoFi.com/eligibility-criteria for more information.


Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

Veterans, Service members, and members of the National Guard or Reserve may be eligible for a loan guaranteed by the U.S. Department of Veterans Affairs. VA loans are subject to unique terms and conditions established by VA and SoFi. Ask your SoFi loan officer for details about eligibility, documentation, and other requirements. VA loans typically require a one-time funding fee except as may be exempted by VA guidelines. The fee may be financed or paid at closing. The amount of the fee depends on the type of loan, the total amount of the loan, and, depending on loan type, prior use of VA eligibility and down payment amount. The VA funding fee is typically non-refundable. SoFi is not affiliated with any government agency.

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